Optimal Capital Accumulation in a Polluted Environment

Abstract

In The Costs of Economic Growth [8], Dr. Mishan criticizes the importance attached to economic growth by politicians, businessmen, and economists. He contends that these groups generally overlook the spillover effect of the growth process-such as environmental pollution. This is nowhere more apparent than in the modem theories of economic growth (see for example [2]). These theories implicitly assume no wastes are produced by the economic process, or, alternatively (and more likely), that if any wastes are generated they can be disposed of at no cost to the community. It is naive to think that no wastes are produced and fairly obvious that the free disposal assumption of the neoclassical growth model is not satisfied in the real world. Accordingly, any theory of optimal economic growth that does not take into account these spillover effects cannot claim to be complete. This paper will investigate the effects of introducing pollution explicitly into the neoclassical growth model. The model is formulated in Section I. Section II contains the solution, while Section III summarizes the discussion.